The Stunning Turnaround at Abercrombie & Fitch (ANF)

Remember when Abercrombie & Fitch (ANF) was that dimly lit store at the mall pumping cologne through the vents?

Those days are long gone. The company has engineered one of retail’s most impressive transformations, with its stock surging over 275% in 2023.

Interest in ANF has exploded among financial professionals, ranking second only to Lululemon (LULU) in retail stock searches, according to our TrackStar data.

After another blowout quarter with 14% comparable sales growth, investors want to know if this remarkable turnaround still has legs.

Here’s our analysis.

Abercrombie & Fitch’s Business

From its controversial past of shirtless models and exclusionary marketing, Abercrombie & Fitch has reinvented itself as a digitally-led, inclusive fashion retailer catering to millennials and Gen Z consumers.

Operating approximately 770 stores across North America, Europe, Asia and the Middle East, the company has transformed its business model to blend digital innovation with carefully curated brick-and-mortar experiences. 

Their product mix spans casual wear, activewear, and fashion accessories aimed at different age demographics.

Abercrombie & Fitch segments its business into the following areas:

• Abercrombie Brands (52% of total revenues) – Premium casual apparel targeting millennials through Abercrombie & Fitch and children through abercrombie kids
• Hollister Brands (48% of total revenues) – Youth-oriented casual wear through Hollister and intimates through Gilly Hicks, focused primarily on Gen Z consumers

The company’s third quarter showed record sales of $1.2 billion, up 14% year-over-year, with comparable sales growth of 16%.

Both brands demonstrated strong performance, with Abercrombie brands growing 15% and Hollister brands up 14%, showing the company’s strategy resonates across demographics.

The company’s “Always Forward” strategic plan focuses on digital innovation, customer analytics, and global brand growth through data-driven store expansion.

This transformation extends beyond just switching up their product mix. They’ve overhauled everything from their marketing approach to their store designs, creating a more sophisticated and inclusive shopping experience.

The results speak volumes – operating margins have expanded to 14.8%, up 170 basis points from last year, demonstrating that this isn’t just a revenue story but a fundamental improvement in business operations.

Financials

Source: Stock Analysis

Abercrombie’s financial transformation has been nothing short of remarkable. Revenue has grown from $3.1 billion in 2021 to a projected $4.8 billion for the trailing twelve months ending November 2024.

More impressive is the company’s profitability trajectory. Operating income surged to $714 million in the trailing twelve months, compared to just $33 million in 2021.

The company generates substantial cash flow, with $545 million in free cash flow over the past year. This represents an 11.3% free cash flow margin, showcasing efficient capital management.

Their balance sheet has strengthened considerably too. The company eliminated all long-term borrowings in the second quarter of 2024, while maintaining $683 million in cash and equivalents.

Valuation

Source: Seeking Alpha

Despite its tremendous run, Abercrombie trades at relatively modest valuations compared to peers. Its forward P/E of 14.8x sits well below Lululemon’s 23.8x and is comparable to Buckle’s (BKE) 14.4x.

The company’s EV/EBITDA multiple of 9.6x also looks reasonable against Lululemon’s 15.2x and Buckle’s 10.2x, suggesting there might still be room for multiple expansion if growth continues.

Growth

Source: Seeking Alpha

Abercrombie’s growth metrics outshine most peers. Their 19.6% year-over-year revenue growth tops Lululemon’s 13.0% and far exceeds Buckle’s -4.7% decline.

Looking forward, analysts expect 12.2% revenue growth, maintaining momentum while building on an already impressive base.

The company’s three-year EBITDA CAGR of 21.5% demonstrates consistent execution of their turnaround strategy.

Profitability

Source: Seeking Alpha

While Abercrombie’s gross margin of 64.7% trails Lululemon’s, their operating margin of 14.8% shows significant improvement from historical levels.

Return on equity stands at an impressive 51.1%, indicating efficient use of shareholder capital. The company’s return on assets of 16.9% similarly reflects strong operational efficiency.

Our Opinion 9/10

Abercrombie & Fitch has executed one of the most impressive turnarounds in retail history.

The company has successfully repositioned its brands, improved operational efficiency, and maintained strong growth while expanding margins.

With a clean balance sheet, strong cash flows, and reasonable valuations despite the stock’s run-up, we believe Abercrombie remains an attractive investment for those seeking exposure to retail’s digital transformation.

The only reason we don’t give it a perfect 10 is the potential for consumer spending to slow in 2024. However, the company’s improved operational efficiency should help weather any temporary headwinds.

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